At the start of each new year, many of us make resolutions to improve our lifestyles. It’s a natural time to take stock of the past year and look to make some beneficial changes for the future. Tops on most lists are shedding pounds, getting fit, quitting bad habits, or learning something new.
In this spirit I’ve come up with my top 4 investment resolutions for 2011.
1) Ignore economic forecasts
We are constantly bombarded with contradictory economic predictions. Markets are forward looking and incorporate all known information into a security’s price. Generally good economic news, such as we see now, has already been incorporated into prices. Therefore, only surprises matter to the markets. Good surprises and bad surprises are the biggest drivers of security prices. The surprising information is instantly reflected in the next day’s prices. By definition, surprises cannot be forecasted, making it impossible to make bets that pay off ahead of time.
2) Keep bonds in your portfolio
I’ve recently fielded many calls from clients who are worried about predictions that bonds are poised for collapse. Bonds have outperformed stocks over the past ten years, which is unusual but not unprecedented. As interest rates rise, the value of your bond holdings will go down. However, over the long run, bond returns are predominantly determined by the interest payments generated from holding the bond. Additionally, the primary reason to hold bonds is to reduce risk in the overall portfolio that includes much riskier stocks.
3) Revisit your asset allocation
The new year is also a good time to review your investment plan. Ask yourself a few important questions: Have my long-term financial goals changed? Is my time horizon different? Has my ability, willingness or need to take risk changed? If you answered yes to one of these questions, then it may be appropriate to revisit your current asset allocation. Making changes to a portfolio based on short-term market disruption is almost always a bad idea. However, reallocating your portfolio based on rational changes to your situation should be done at any time the need arises.
4) Control the controllable, ignore the rest
It’s easy to say, but hard to do. The highest probability of investment success comes from 3 important factors:
• Understand Risk: Determining asset allocation based exclusively on your need, willingness and ability to take risk.
• Control Costs: The use of low-cost passively managed mutual funds that match the return of the various markets will result in more money in your pocket at the end of the day.
• Diversify: Incorporating various asset classes into an investment plan reduces overall portfolio risk for a given level of expected return.
The value of an investment advisor is to help you understand these factors for investment success and provide the discipline to carry out the plan, often in opposition to conventional wisdom.
Other articles filed under Investing
August 16, 2018
While you should think about retirement planning as early as possible, the five years leading up to retirement are critical. If you believe you are 5 years or less away from retirement, now is the time to seriously take a...
August 6, 2018
It’s simple. Don’t. A common question we receive is “how do I prepare for the inevitable stock correction?” There are two answers to this question: the one you want to hear (which is wrong), and the one you don’t want...
July 24, 2018
Stock Markets Returns from various stock market indices over several periods ending June 30, 2018 are shown to the right. Here are a few highlights: Domestic stocks continue to lead the way. REITs were up nicely for the quarter, but...
July 18, 2018
A recent headline in the Wall Street Journal declared, “A Generation of Americans Is Entering Old Age the Least Prepared in Decades.” The article starts out by stating, “Americans are reaching retirement age in worse financial shape than the prior...
May 8, 2018
Last week, we introduced you to our weekly Investment Committee meetings. When we met for class on 4/27/18, we began our discussion on the subject of an "optimal portfolio." The centerpiece of investment management is portfolio construction. Alongside financial planning,...